Friday, December 21, 2007

Taxing Universities: The IRS Gets into the Act

By Richard Vedder

Dean Zerbe, a top aide to Senator Charles Grassley, once told me "if you want to change university behavior, make more use of the IRS to do it." That may be good advice. The IRS is now going to be asking the universities for more information for the 990 Form that universities must file. While there is always a tradeoff between administrative costs to the university and the public's right to know, I suspect the IRS changes in the 990 form are reasonable. We need more detailed information on, for example, how universities use tax exempt endowment income.

Beyond that, the IRS is going to sample several hundred schools and get even more detailed information --how much did the president make, and how is her salary determined? How much tax exempt money went for essentially non-academic enterprises --improving the stadium, for example? This, too, is a welcome move. I don't like an overly large and intrusive IRS, and think federal taxes are a significant impediment to economic growth. However, if we are going to have this system, we need to be sure the universities are not significantly abusing the public interest and thwarting the spirit if not the letter of our tax laws.

Our tax code is a mess. It is perversely complex, raising compliance and administrative costs by literally hundreds of billions of dollars annually. It violates basic concepts of horizontal equity by taxing persons of similar economic circumstances vastly different amounts. The Tax Army (tax collectors, H & R Block type firms, many accountants and lawyers) is now bigger than the U.S. Army. We need to simplify the system --drastically. Basic principles of economic neutrality are routinely violated. The university dimension on this is actually comparatively small. But we need to rethink how we treat universities with respect to taxes. And before rethinking, we need to know what the universities are doing. The IRS approach is reasonable and proper.

1 comment:

Maybe my view of the world is too narrow to see how the IRS is "reasonable and proper". In my view the IRS is part of the problem. However, at this time I am not going to bother elaborating since CCAP seems to have latched onto some sort of belief that using the IRS to dig into endowment practices is going to intimidate them into spending more out of their endowments to make college affordable. I don't understand the rationale.

The president of Ohio University presents two graphs on the ohio.edu web site showing cost v. revenue. The presentation shows Ohio operating in the red. Yet there is no mention of covering the losses with endowment funds. So if losing money doesn't merit endowment spending, I don't know what will.